Design

D e s i g n Steps 4. Commit to fostering basin water security in the engagement policy 5. Develop a best-suited engagement strategy 6. Define meaningful metrics and targets

It is key for an investor to design a continuous, well-structured engagement strategy in order to move investees towards closing the basin water security gap. Successful engagements can increase the factor-adjusted performance of companies by 4.4%, while unsuccessful engagements do not lead to any measurable impact (Dimson et al., 2015). Such a structured engagement must start with a strong commitment from the top of the organisation and continue with the right strategy and metrics to measure the impact (Ceres, 2018).

Step 4: Commit to fostering basin water security in the engagement policy Deciding to act on basin water security requires commitment from key decision-makers within the organisation. Water is only one of the key topics that investors are focusing on in their investment and engagement strategy, but it is important to be aware that the complexity of focused engagement on water requires significant resources. The commitment to basin water security should be integrated within an overall engagement policy that is closely aligned with the investment policy.

The communication of engagement goals and approach is key. External disclosure typically keeps investors committed, in part to protect the reputation and credibility, and clarifies expectations towards investees and other investors. Internal disclosure helps to establish basin water security within the organisation’s culture and sends a message to all departments on its importance. Investors can commit to water security by developing a public investment belief or policy statement that is committed to promoting basin water security. In addition, it is important to commit internal resources to implementing and tracking performance against this goal or policy. The commitment to foster basin water security should be signed by the organisation’s senior management, be publicly disclosed and explicitly include 7 :

I _______ commit to basin water security by:

fostering the sustainable quantity and quality of freshwater resources for all water users in the long term; actively engaging with investees to move towards basin water security and supporting them on their journey; upholding the four principles of basin water security (grounded in an analysis of risks, equity, alignment with basin thresholds and collective action); and engaging stakeholders openly and transparently.

7 For more inspiration, Ceres Investor Water Toolkit created a database of investment belief and policy statements focused on water.

Other key elements to include in the engagement policy to complement the basin water security commitment are: • investment beliefs; • expectations towards investees (also including other ESG themes); • codes and principles that are being followed (such as the

UN Principles for Responsible Investment [UNPRI] or the Task

Force on Climate-related Financial Disclosure [TCFD] (2017)); • the type of engagement strategy applied; and • asset classes covered (%).

The policy should be continuously monitored and updated to reflect the developments in trends in the water area. As this field is currently changing rapidly, it is necessary for investors to stay up to date.

Step 5: Develop the best-suited engagement strategy While there are many different ways to engage on basin water security, such as through educational outreach or by convening summits, this guide focuses on direct engagement with investees to achieve the desired impact.

An engagement strategy can usually take one of two main forms, reactive or proactive (UNPRI, 2016). A reactive engagement strategy comes into play when an investee violates the responsible investment or water policy, or does not improve its water management. In this case, the investor might first try to have a dialogue with the company and, if rendered ineffective, decide to exclude the investee from the portfolio. A proactive engagement strategy, however, focuses on improving companies’ ESG performance by ensuring basin water security. This guide focuses on a proactive multi-year engagement strategy. To achieve the desired positive impact, a multi-year engagement is necessary as it takes time for companies to improve and gradually increase their level of ambition.

When developing the engagement strategy targeted towards basin water security, there are some key topics to consider: • asset class: whether investors hold bonds or equity affects the engagement strategy. 8 In both cases, engagement towards basin water security can be successful; ° fixed income: when engaging corporate bond issuers, it is important to emphasise the relationship between unmanaged water risks and potential downgrades in a company’s credit rating. An investee’s board or management should be convinced that responding positively to the engagement could mean more responsiveness from and attractiveness to other (sustainable) investors in the future; ° equity: whether public or private equity, shareholders have more leverage and a greater number of instruments at hand when engaging with an investee. The benefits of

active ownership are countless and recommendations are given within this guide; timing: depending on the type of investment held, engagement with potential investee might be more purposeful prior to placing an investment or while already being invested; ownership: generally speaking, for equity investors, the higher the share, the higher the leverage. Whether investors own a small or large share, they should consider collaborating with other investors; length of engagement: on average, milestones are achieved nearly one-and-a-half years after the initial engagement (Dimson et. al, 2015). Longer engagement horizons are preferable, as it allows for a dive deep into the investee’s risks and can lead to real change in basin water security; number of engagements: the number of investees targeted by an investor depends on his intention, budget and resource availability. For an engagement focused on basin water security, which is time- and resource-intensive, the suggestion is to engage only a few companies at once; and in-house or mandated: some investors employ third-party advisors to conduct research and perform their proxy voting rights (for example Sustainalytics or ISS).

The main goal of the engagement is not to engage with a large number of investees, but to achieve long-lasting positive impact on a given water basin. As basin water security is quite complex and requires significant resources and time to achieve, the suggestion is to directly engage with investees. This allows investors to have a dialogue with the investee and collaboratively identify the next steps for the investee to move towards basin water security. There are different possible engagement strategies.

Step 6: Define meaningful metrics and targets Define SMART (specific, measurable, achievable, relevant and time-bound) targets that measure the impact towards basin water security.

Example of SMART targets •

By 2025, 50% of investees aligned with water security in priority basins and 100% by 2030.

By 2025, 100% of investees in priority basins set water withdrawal and discharge targets aligned with basin thresholds.

To track progress against those targets and measure the success of the engagement, relevant metrics should be selected. This can be done using a qualitative or quantitative approach.

8 UNPRI has developed a guide on ESG engagement for fixed income investors (2018c).

Quantitative approach Quantitative metrics measure the outcome of basin water security through, for example, improved water quantity and quality. These outcomes will be significantly more difficult to measure than qualitative metrics and are only measurable after the effects of the company’s water management are visible. This may take some time, but these metrics should absolutely be included and measured in the long term.

Examples of quantitative metrics may include (adapted from California Water Action Collaborative initiative of the CEO Water Mandate, 2019):

increased water supply and reliability (million cubic litres saved and returned to the basin); Increased climate resilience of water systems (hectares of land contributing); improved water quality and prevented pollution (BOD and toxicity aligned with ecological limits); protected and restored freshwater ecosystems (hectares of land with restored ecosystem function); and river flow restored (cubic feet per second).

Qualitative approach Below is a non-exhaustive list of possible qualitative metrics to support a qualitative approach that is aligned with the four principles of basin water security.

Proposed metrics aligned with the four principles of basin water security

Category

analysis of risks Metrics

Holistic local water risk assessment taking basin context into account (ecosystem and stakeholders)

Water dependence measured for direct operations and supply chain Grounded in an

Water-related negative impacts related to direct operations and supply chain

Future risks and scenarios assessed

Water risk results integrated into business and growth strategy

Priority basins identified

threshold Water quantity and quality targets that take into account shared challenges set in direct operations and supply chain

Aligned with basin

Context-based targets set for priority basins

Water use maintained consistently below allocated renewable water use

Water discharge is within ecological limits of water resources Unit of measurement

% of companies

Name and # of basins

# of targets

% of companies

Proposed metrics aligned with the four principles of basin water security

Category

and respecting other water users

Engaging in collective action to respond to shared water challenges Metrics

Key users in the basin identified

Shared challenges identified (taking into account other water users)

If there are shared challenges, communities’ right to water is prioritised Operating equitably

Public acknowledgement of the human right to water

Social, environmental and economic factors considered in water management response

Investee supports programmes to provide water/sanitation access to underserved communities in the basin

Key users and existing water stewardship initiatives are identified

Key partnership established to address shared challenges on a basin level

If no existing stewardship initiative available, the company has a multistakeholder approach initiated in priority basin

Plan with targeted actions and implementation strategies to respond to shared challenges and measure progress

Certified priority basins (e.g. under AWS) Unit of measurement

# of users

% of companies

# of users

# of partnerships

# approaches

# of actions

# of sites certified

Investors should choose a data-gathering approach that is aligned with their internal procedures and practices and existing indicators to monitor the investees’ performance beyond financial returns. For example, complement the above metrics that are aligned with the four principles of basin water security with common water-related key performance indicators (KPIs) from the IRIS catalogue.

ACTIAM case study

ACTIAM is an asset manager that very actively engages its investees on water issues. ACTIAM has also set a water-neutral portfolio target, in line with SDG 6. ACTIAM defines waterneutral companies as businesses that do not consume “more water than nature can replenish” (Hoekstra, 2008). This target aims to reduce the water use of companies they invest in from key sectors and in areas prone to water scarcity by 2030.

As a first step in defining the engagement, investees are prioritised according to ACTIAM’s sustainability framework depicted in figure below. Companies are assessed based on their capacity to adapt to the transition required to create a sustainable society. ACTIAM identifies the target companies for engagement based on several criteria; companies that are in high-risk industries such as mining, energy, agriculture or textiles and those located in high-risk areas are prioritized for engagement. ACTIAM also assesses how companies manage water-related issues.

ACTIAM’s approach serves as a great example of how a water engagement strategy should be designed. The main focus is on moving companies in the water management zone to a water stewardship zone.

ACTIAM’s engagement strategy has two main forms: responsive and proactive engagement. A responsive engagement is carried out when the investee violates ACTIAM’s Fundamental Investment Principles, for example, by causing serious environmental damages. If the responsive engagement is unsuccessful, ACTIAM has several escalation strategies in place.

Through proactive engagement, ACTIAM seeks to support companies that have the potential to implement the solutions needed for the transition to a sustainable society. For every engagement, ACTIAM sets clear objectives on the expectation of companies to, for example, map and manage water risks, prevent water loss and quantify their dependency on (scarce) water. Performance on these objectives is monitored on an ongoing basis with the aim of moving companies to the water stewardship zone.

The ACTIAM Sustainability Framework applied to water consumption (Source: ACTIAM, 2019)